The Covid-19 pandemic and sovereign bond risk

Governments around the world are tackling the Covid-19 pandemic with a mix of public health, fiscal, macroprudential, monetary, or market-based policies. We aim to quantify the impact on European sovereign CDS spreads of the pandemic and the policy measures taken by governments in an event study. We find that a higher number of cases and deaths and public health containment responses significantly increase the uncertainty among investors in European government bonds. Other governmental policies magnify the effect in the short run as supply chains are disrupted.